By the end of the month, the whole web site will be looking the way I want it, and I'll start to focus more on the blog part of the site.

Week #5 Report

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Bill's Portfolio:

This is the week that the SBC Communications (NYSE: SBC) takeover deal with AT&T (NYSE: T) came to be. Unlike the Procter & Gamble (NYSE: PG) deal the week before to take over Gillette (NYSE: G), I really like the SBC deal.

And the SBC stock has done well too, so my recommended trade is working out. On the other hand, I recommended a short-term trade in PG strictly on the basis it would be a flip on the rebound of the oversold reaction to the Gillette deal.

Yes, that PG trade was a good one " for about two hours. I should know better than to get into intra-day trading recommendations in this blog. I don't usually. All I can say is that my head hasn't been screwed on altogether properly in recent days.

Well, the PG deal started to look like it might fall apart after analysts started to review the Gillette execs pay package put together shortly before the deal was announced. That didn't help the PG stock, which was already reflecting a bad all-around deal, and so there wasn't much of a PG rebound.

On a strong day for the Dow Friday, PG was down.

I was happy to see that Levi Bauer's pick of a small pharmaceutical stock (NDQ: KOSP) called Kos Pharmaceuticals had such an immediate move upwards within five minutes of the time I posted his report in my blog.

KOSP was up 6.35 percent from $32.44 at time of publishing (1:22 pm Thursday), until about 10am Friday, at $34.50. That's just three hours of trading, so Bauer's report struck a nerve. But, I also note that the KOSP price weakened in the closing minutes of Friday to close the week at $34.41.

BTW, Levi is a medicaid analyst who aspires to a job in the capital markets, and so he created this report on KOSP to send to a prospective employer on Thursday. Pretty good advertising I'd say.

His 'Soothsayer of Omaha' blog also looks pretty good for a 24-year old, although I was having problems getting it on my screen. Maybe he's just a little too successful?

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ETF:

These sector charts are for (1) sectors 10 (energy), 15 (basic materials), 20 (industrial) and 25 (consumer discretionary) (2) sectors 30 (consumer staple), 35 (healthcare), 40 (financial) and 55 (utilities), and (3) sectors 45 (diversified tech, software, semiconductor), and 50 (telecom).

Last week, I recommended that traders look for opportunities to accumulate good quality stocks that are priced relatively low in the healthcare sector 35, and in the telecom sector 50.

I also suggested that the semiconductor sub-industry group (of the tech sector 45) looks like it might gain strength ahead of the most other technology sub-industry groups. That isn't the conventional wisdom.

Elsewhere today, I pointed out upward movement in KOSP (sector 35) and SBC (sector 50), which I like.

I am also starting to consider the goldminers again (sector 15 basic materials) on the basis that the USD may start to move higher, but I want to see the Euro:USD rate above 1.32 to confirm my interest in the golds.

In the meantime, the goldminer ETF that trades on the Toronto Exchange could be attractive. This is the iUnits S&P/TSX Capped Gold Index Fund, which trades under the ticker symbol TSE:XGD. It could be good timing to start taking fractional positions in XGD, saving most your ammunition for when the USD starts heading south again, which is when the gold stocks will start to move up.

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Bonds:

Based on higher prices, the bond market continues to reflect an economic slowdown. Economy touts like CNBC's Larry Kudlow can't argue with a yield spread that is now down (still further) to 214 basis points.

You'll note from these charts of the U.S. Treasury debt market that all rates started to rise in April 2004, immediately after the March Jobs Report. The short rates have continued to rocket north, but the longer the maturity, the rates have increased less.

In fact, the 30-year U.S. T-Bond rates have actually fallen since June.

As each week goes by, you will see more traders trying to pick the cycle top for bond prices and the cycle low for yields on the long maturity bonds. At least, when the long bonds reverse trend, I think we'll all see it -- and the negative impact on some of the interest-rate sensitive stocks will be apparent.

From the Fixed Income (Bonds) Yield Table at Yahoo Finance, you can see that the 30-year U.S. T-Bond is now yielding just 4.48, down on the week from 4.64.

Until excess cash starts to move into equities, it is used to buy up the long bonds. This allocation process has resulted in depressing yields on the long bonds to record lows, which is a superb environment for the mortgage finance industry.

It's an extended situation, however, that will terminate when (i) yields on the mid-term (5-and-10-year bonds) start to move higher as they did later in the week, or (ii) equity prices and/or dividend yields become relatively more attractive, or (iii) when the U.S. economy starts to move up a gear. The latter will be evidenced by increased jobs, or expansion in the yield spread on the 3-month and 30-year U.S. treasury debt instruments, or an increase in its slope.

I have a look every day at the "Living" Yield Curve at Yahoo Finance. The slope has been flattening, which is evidence the U.S. economy is slowing. Securities traders are waiting for the slope to increase as a sign that the economy is improving, and that's when they intend to plow more of their cash reserves into equities.

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Commodities:

Commodity prices are indexed by the Commodities Research Bureau. The CRB index ($CRB at StockCharts.com), daily data view, looks like commodity prices have continued to broadly decline over the past week, as I had forecasted the prior week.

There is more to come on the downside from the CRB index, largely because of falling oil prices.

This chart of the Crude Oil price ($WTIC at StockCharts.com), daily data view, shows that oil prices are still on the decline, now down to $46.48 at the week's close.

The G7 meeting representatives are calling for the opening up of additional oil and gas reserves in the world, which presumably means from China, Russia and India, since those countries were invited to send reps to the G7 meeting this week.

A lower crude oil price will lead to cheaper refined gasoline product, and if, as and when consumers can pay less to fill up their vehicles at the gas pumps, they will visit retailers like Wal-Mart (NYSE: WMT) more frequently, and they'll have more money to spend at those cash registers, which in turn drives more production of goods, and hence more economic activity.

So the question now seems to be, when does the world see $35 oil (not $55 oil)?

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Gold:

Unless inflation happens to become somewhat extreme, which is not going to happen for a long time, gold is going to trade like a currency, representing unallocated cash.

Although it appears to be a wait-and-see on the USD after the conclusion of this week's G7 meeting of central bankers and finance ministers in London, there have been continuing signs that traders do like the USD rather than gold.

The gold market softened further this week, both for the bullion (NYSE: GLD), which closed the week at $414.57, and for most of the goldminer stocks.

As long as the Euro is weakening against the USD, traders are very unlikely to start chasing gold bullion or goldminer shares, and may even sell them down a bit more here.

Traders sold off gold bullion heavily at the market open on Monday (Jan 31) and Thursday (Feb 3), and to a lesser extent at the open on Tuesday (Feb 1), as we see from this (interactive) chart of the GLD bullion ETF that trades on the NYSE.

Traders also indicated that after the Thursday opening sell-off, they went back into the goldminers, as we see from this (interactive) chart of the goldminers that trade on the NYSE.

Is this end-of-the-week trading in goldminer shares simply short covering, a recognition that the price cycle is now extended on the down side? After all, most of the major goldminers have lost about 20 percent in the past ten weeks, as seen in the following weekly data chart from StockCharts.com.

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Forex:

By now, every securities trader in the world must know that the Chinese yuan is pegged to the USD, and the leading industrialized nations of the world want it to be revalued, which would send the yuan much higher.

That revaluation would make U.S. imports from China relatively more costly. As the U.S. is a net importer from China, U.S. buyers would be facing higher prices and would presumably go looking for products manufactured in other countries, say Japan and Germany.

So, until it eventually happens, you can expect the Japanese and Germans to be harping on this yuan revaluation issue, and the Americans paying lip service.

Did you notice that the Bush administration now has Messrs. Buffett and Gates both saying the things Washington now finds politically incorrect? This enthusiasm for a weaker dollar must be driving George Soros nuts, as he's short the USD (apparently). Too much sentiment in one direction usually sends the market off in the opposite direction.

A higher yuan (versus the USD) presents a double-whammy to Americans, as in addition to making U.S. imports more costly, it would also be attractive to all countries in the Far East, like Korea as well as Japan, since all these countries are net exporters to China. China buyers would have an easier time of purchasing there.

The U.S. administration will only truly want the Chinese yuan to float (upwards) if ever the U.S. becomes a net exporter to China " like Korea and Japan are today.

All this is obvious. It is just as obvous that China has no intentions of changing its financial model right now because, as the saying goes, if it ain't broke, don't fix it.

Today in London at the G7 meeting, China's Deputy Central Bank Governor Li Ruogu said there is no timetable for a revaluation of the country's currency. Reps from China, India and Russia are also attending the meeting of the G7 (U.S., U.K, Germany, France, Italy, Canada, and Japan).

Mr. Li will likely change his tune only when interest rates start to rise in China (as needed to keep foreign direct investment (FDI) high enough to meet the needs of a rapidly growing economy) to a point that the Chinese domestic economic growth is burdened, and the Chinese people start to complain.

You see, politicians in China are no different than elsewhere in that they will always cater to the needs of their own people before listening seriously to the needs expressed by leaders of other countries.

In any event, the weak USD is now stabilizing. This USD chart (from StockCharts.com) clearly shows a higher cycle low, followed by a higher cycle high. So, the USD continues to strengthen in the short run.

In my view that strength has resulted more from USD short-covering plus expectations for lower crude oil prices (and what that might do to the economy) than based on more important factors (actual economic growth, international trade deficits, and government spending deficits), and so is short-lived.

Longer-term, I see the USD price trend weakening, as it has for the past few years, but not to the same extent.

In the meantime, as prices don't move on a straight-line path, traders have to acknowledge the short-term cyclic strength in the USD.

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Int'l Equities:

As to the global stock markets, let's have a look at the past week's activity through a snapshot of the interactive charts at Investertech.com (Japan, Taiwan, Hong Kong, Singapore) (U.K., Germany, France, Italy) (Canada, Mexico, Brazil, Australia).

Note how the Japanese stocks ETF took a dive at the open on Thursday morning.

The commodity producing countries (Canada, Mexico, Brazil and Australia) all had a very good week as evidenced by the country ETF.

Also, note that the U.K. stocks ETF is a frequent trader, the German stocks ETF less so, and that there is much less liquidity in trading the French and Italian stocks via the ETF.

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U.S. Equities:

After the gap upward open on Monday, last week was more sideways tracking of U.S. equity markets until Friday, as traders jumped into stocks when they saw the yields on long bonds dip sharply. That move confused me because the Fed is clearly tightening (as seen by the upward move in yields for the short-term treasury instruments), and I see the fixed income investors simply parking money in the long bonds so to avoid capital losses in the short bonds.

While lower yields on the long bonds helps the mortgage finance industry, and the regulated utility industry (since they hold big bond positions, which increase in value as the yields drop), it also reflects a slowing of the economy. So what does a slowing of the economy plus a tightening of money liquidity by the Fed almost always lead to? Yes, yes, yes " lower stock prices.

The fact it hasn't means that equity traders are happy with falling commodity prices (such as oil). I don't know what else they have to crow about?

Readers seemed to like the Dow 30 price performance table I published, so I'll do it again.

You can create this same table, but I can't give you a direct link. You will have to go to Investertech.com, and into the window for Summaries, load in the following string for the Dow 30 ticker symbols. After you bring up the list, click on the Performance tab, and voila, there it is.

To find the relative price performance of the Dow 30 components, you need to sort on the column of the period that interests you.

AA AIG AXP BA C CAT DD DIS GE GM HD HON HPQ IBM INTC JNJ JPM KO MCD MMM MO MRK MSFT PFE PG SBC UTX VZ WMT XOM

When you click on the YTD%Net header, the sorted data will show you that of the 30 Dow stocks, only 11 have performed well this year to date. Altria (NYSE: MO) leads the pack with +10.51 percent gain, followed by Exxon Mobil (NYSE: XOM) at 10.38 percent gain.

Honeywell (NYSE: HON) at +7.22 percent on the year, had its big week (+6.22 percent) last week. And Johnson and Johnson (NYSE: JNJ) +5.31 percent YTD, has been up 7.10 percent in the past two weeks to move into fourth place, after a bad start to the year. For charts, click on the ticker symbols below.

Here are the Dow charts from Investertech.com that I broke into groups of ten, which you can add technical indicators for as well. (list one) (list two) (list three)

Here are the links to the individual Dow stocks. You can look at the different time frames from intra-day to monthly data charts, and see the technical indicators at the points where trends and cycles reverse.

One caveat to traders who are new (and some who aren't so new) to time series data charts is that the indicator line moves ahead of actual data that caused it to change.

Also, if a data element happened to be so extreme as to change an indicator line one day (or week, month, etc), it could reverse direction and the smoothing line would also change. That means that a technical indicator line on a chart that shows a reversal this week just might not show a reversal for the same period on next week's chart.

This is a little of the magic of charting using smoothing algorithms. So, the moral is don't pretend to be a charting expert (until you really are), because you might get fooled.

Now, while I'm poking fun at chartists, I do have to remind novices to the Elliott Wave Theory (EWT) that nowhere in my career have I seen such chart revisionist activity, but for EWT there simply is no excuse because those lines are being drawn by hand.

I don't want to rain on somebody else's parade (nobody's perfect), but the number of times I have seen EWT charts changed (i.e., re-drawn by changing the EW counts) is too many to count.

Hindsight leads to a lot of puffery, and when the pastry happens to be somebody selling you, try to be cautious. If, on the other hand, it's your own money you are tracking via charts, and looking for indicators, you tend to be more serious about the weaknesses of 'trend following' charts as indicators of price direction.

I use technical algorithms in my work for trading purposes, but I also use them a lot in this blog simply because a picture is worth a thousand words. Because you read my blog, you might be misled into believing I am more of a chartist than I am.

So, again, here is the list of 30 Dow stocks with links to charts at Investertech.com. This is a pretty good service, which I recommend. It could be better, but I suppose so too could I, you, and everybody you know or know about.

AA

AIG

AXP

BA

C

CAT

DD

DIS

GE

GM

HD

HON

HPQ

IBM

INTC

JNJ

JPM

KO

MCD

MMM

MO

MRK

MSFT

PFE

PG

SBC

UTX

VZ

WMT

XOM

Here is a chart of the Dow, S&P 500, Nasdaq Composite, and Russell 2000 (small cap) indexes. I like to look at them all on one page like this to see which market is relatively outperforming.

Also, occasionally one of these markets hits a technical support or resistance line before the others, so it might be interesting to observe what is happening at those times.

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Personal

This has been another challenging week. I don't feel up to my usual commentary. Also, I'm rushing to take my family up to my parents Lodge, and I'm an hour late. Dad already called this morning ("How's Stelco?), and I had to remind him it's Saturday. Then it was: "When can you come up?" as if he didn't know we were on the way in a couple hours.

My son visited them last evening. Then he called to say his Grandpa had given him a gold watch " the one his employer had presented to Dad when he retired after 40 years there.

My son wanted to know why he received this gift, and I said it's what people do to be remembered by future generations of their family.

Dad's family (all Roman Catholic but him) are the Ciccarelli's and the Laroca's of Caserta, a small city in the mountains about 30 miles from Naples. It's the place where the German army surrendered to the Americans in the Italian war theatre of WWII.

BTW, Mom's family (on her Dad's side) are the Neilly's of County Ulster in Ireland, along the rugged north-east coast, which is now Catholic Northern Ireland. The Neilly's are staunch Protestant -- Orangemen actually -- so they emigrated to Canada (Meaford Ontario on the Georgian Bay waterfront) in the 1860's or soon after.

The other half of Mom's family are the Dobson's from the McLeod clan, formerly of the Isle of Skye (Dunvegan castle and all), an island off the western coast of Scotland, across from Ulster, and a part of Scotland. They too emigrated to Canada about the same time, and also to the Georgian Bay waterfront, at Thornbury, which is about ten miles from Meaford, at the base of the Blue Mountain ski area.

I have photos of the original Neilly and Dobson families, which I intend to post here some day. Unfortunately, I don't have the original Ciccarelli-Laroca family photos.

Enjoy your weekend.

BCara@BillCara.com